Monday, July 28, 2008

The Associated Press's Charles Babington reports on what we currently know (and don't know) about Sen. Obama's plans for Social Security reform:

Barack Obama's bid to place a new Social Security tax on very high incomes is either a bold or foolhardy plan, depending on who critiques it. But its potential impact is almost impossible to gauge because he is providing few details on basic questions such as what the tax rate might be, what types of income would be taxed and how the taxpayers' benefits would be affected. The Democratic presidential candidate says he would work with lawmakers from both parties to resolve such matters. Voters generally applaud bipartisan cooperation, but they apparently will go to the polls this fall with only a vague notion of what Obama has in mind.

Obama made headlines June 13 when he called for a Social Security payroll tax on incomes above $250,000 a year. Currently, the tax is levied only on the first $102,000 of each worker's income. That covers the entire salary of most Americans. Obama would not apply the Social Security tax to annual incomes between $102,000 and $250,000, a move meant to avoid alienating several million upper-income voters. His proposed change would apply only to those earning more than $250,000 a year, or about 3 percent of all taxpayers.

When he outlined his idea in the battleground state of Ohio, Obama said it is unfair for middle-class earners to pay the Social Security tax "on every dime they make," while millionaires and billionaires pay it on "only a very small percentage of their income." He also said the Social Security program needs revamping to bolster its long-term viability.

With Obama offering few details, several news accounts suggested that his proposed tax on very high incomes would be applied just as the existing Social Security tax is levied on incomes up to $102,000. All workers pay a 6.2 percent Social Security payroll tax on such income. Their employers match it, for a total tax of 12.4 percent. The tax applies only to earned income, not to passive income such as dividends and interest.

In recent weeks, Obama aides have quietly indicated that the proposed tax on incomes above $250,000 might be different in key aspects. The rate probably would be about 2 percent to 4 percent, not 6.2 percent, they said. It's also possible that it would apply to more types of income, including dividends and investments. As for benefits, the campaign has not said how the proposed tax on very high incomes would translate into new retirement income, if any, for those who pay it. The campaign "has not put forth a specific plan" for Social Security, Obama economic adviser Austan Goolsbee said in an interview.

Perhaps because so many details are missing, Obama's Social Security proposal has generated relatively little debate on the campaign trail. But any change to the massive program could have far-reaching effects. Many Americans rely on Social Security for much or all of their retirement income. Some workers, meanwhile, do not realize how much is withheld from each paycheck for Social Security and, to a lesser degree, Medicare. Nearly three-fourths of all workers pay more in these payroll taxes than in federal income taxes, according to the Center on Budget and Policy Priorities. The center assumes that workers pay the full 12.4 percent in Social Security taxes, contending that employers would devote their half of the total to salaries if they did not have to make the 50-50 match.

Given the dearth of details about Obama's plans, some Republicans have criticized it, using assumptions that Democrats reject. Lawrence B. Lindsey, a former economic adviser to President Bush, argues that high earners would pay the full 12.4 percent tax rate on income above $250,000 while receiving no added benefits. "A high-income entrepreneur would see his or her federal marginal tax rate rise to 53 percent from 37.7 percent," Lindsey wrote in a June 20 Wall Street Journal op-ed column. The marginal tax rate is what a person pays on each additional dollar earned. Lindsey wrote that Obama's plans would provide a powerful incentive for the highest-earning Americans to work less, invest less and contribute less to the economy.

Former Oklahoma Sen. Don Nickles, a Republican, agreed. A person who owns two restaurants and makes $500,000 a year would have little incentive to open a third restaurant under Obama's tax plans, and might even close one, Nickles said in an interview. "He's not going to be hiring more people," Nickles said.

Obama economic adviser Jason Furman, responding to Lindsey in a letter published by The Wall Street Journal, said Obama would "work with Congress on a bipartisan basis to design the details" of his Social Security plan, "including the tax rate, how it is phased in over time, the linkage between these tax payments and benefits, and other critical design elements of this plan." Furman wrote that Obama "has not proposed a 12.4-percentage point tax increase on earnings above $250,000."

It seems that both presidential campaigns are slowly asymptoting toward the same general campaign position: pledge support for reform and a willingness to discuss different options with the opposing party in Congress, but don't offer a full reform plan that could be shot down during the campaign season.

2 comments:

George
said...

While it's true and expected that neither has offered a full and detailed plan, the different approaches each candidate would take are clear. Obama would focus on raising the payroll tax on individual income above $250,000 (and his advisors say the new rate on that income would total 4% or less), while McCain has said he will reduce future benefit growth and implement personal accounts. The differences between these approaches should not be downplayed.

George, You're right that McCain and Obama differ on Social Security. However, things have moved a bit to the center lately both on policy and on process. Obama's proposal has moved from essentially all taxes and no changes to benefits or the retirement age, to a smaller tax increase (probably a 4% surtax on earnings above $250k, which would solve around 15% of the 75-year deficit) coupled with a commitment to work with Congress on an overall package.

McCain has also shown more flexibility. Previously, he'd ruled out any tax increases, which implied achieving solvency only through benefit cuts or increases in the retirement age. Yesterday on ABC he stressed the need for compromise and that everything, including tax increases, should be on the table.

There are still obviously differences, which is a good thing, but both sides seem to realize and any viable reform package will have a number of different elements to it, which inevitably will be up for negotiation.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.